How Smart is Smart Telecom’s 74 Shillings per call Strategy?

If you have an idea of setting up a new telecom company in Uganda, just get Warid branding colors, put your tariff offers at a crazy low price, and you will have the attention of the public. Uganda’s telecom industry has been a roller-coaster in the recent past, from acquisitions, to rumors of market exits, and it is just the beginning.

Last month, a new player Smart Telecom joined the game and has become the 7th entrant in the industry joining MTN, Airtel, Uganda Telecom, Orange, Smile and K2. All signs point to the fact that Smart Telecom could have a vision to fill the gap Warid Telecom left in the market both in strategy (price model) and the almost similar brand colors.

Before Smart Telecom, there was Sure Telecom a Singapore based company that owned the license for two years, but failed to launch. They later sold the license to the Aga Khan Fund for Development (AKFED), which recently launched the network under the Smart Telecom brand.

AND THE COMPETITION IS NOT YET MOVED

The company came in the market with the idea of offering triple play (voice, data and video) services to Ugandans, but it’s the Voice tariff that has become the talk of the town. If you make a call from Smart telecom network to any other network for any period of time, you will be glad to know that you will only be billed UGX 74 ($0.03), which is a great bargain for most customers. It is the same low tariff model that Warid Telecom began with in 2008. Their unique offer is the flat UGX 74 tariff charged per call irrespective of how long the call lasts. It should also be taken into consideration that the regulator’s set interconnection rate is about UGX 180 ($0.07), and now we ponder on how long Smart Telecom will last with its price war strategy of offering services below the cost of business. Looks like a deliberate plan to put more money into their competitor’s pockets. Currently covering only Kampala, the new telco’s flat rate is 3.6 times lower than the average amount of UGX 270 ($ 0.11) charged by other players per minute. I doubt if the existing operators will be moved by the new entrant’s tariffs. The old dogs have been there and know how hot the fire is, and cannot dare make that mistake again. MTN with 8.8 million subscribers and Airtel with 7.2 million, the duo has taken over Uganda’s voice market and even if a new entrant offering free voice calls came into the market, there is a high possibility that they would not be indulged in season two of price wars. In 2010, when Warid stirred up the price war game in the telecom sector, they attracted as many customers as possible, and this is the period where subscriber numbers in the market hit flood tide. The market distortion resulted into a rapid decline in call rates for both off and on-network calls from a market norm of UGX 380 ($ 0.11) per minute to UGX 180 ($0.07) per minute and later to 1 UGX per second for on-network calls. One year later, voice call tariffs increased once again up to UGX 4 per second. Warid telecom followed suit and succumbed to the industry pressures, they were hit by reality. The real costs of doing business seemed not favorable for the fallen telecom. The above not withstanding, other factors like high interest rates, the unstable exchange rate and high fuel prices forced the sector players to hike call rates to tally with business costs.

THE CONSUMER BEHAVIOR

Whereas people love freebies, all signs seem to show that most existing subscribers are already locked down to their current carrier networks. What I find most puzzling is people complaining about poor voice network services on certain networks but they cannot leave them and go to other networks. You can’t blame them either, among other strong points the existing ‘old dogs’ have an advantage of good a coverage footprint even in the deepest of villages. This is always a challenge that new market players face at launch. The real consumer behavior is such that, majority of Ugandans either have an MTN or Airtel SIM for voice, they will probably have an Orange data line in their modems. So having another SIM card, however low the cost could prove a burden to support. In the absence of mobile number portability, some of the consumers are only left with few options, like using multi-SIM capable phones or carrying more than one phone. Such behavior makes churning from old networks a bit of a challenge to new players in the voice market.

THE INSURANCE MODEL

So how could this UGX 74 per call model work for Smart Telecom to stay in business? Lets look at the our brothers in the insurance industry, where you have more people contributing to the pool than those making insurance claims, there is always enough to pay the claims. To keep the analogy, in this case they would back on the fact that people do not last the same periods of time on a call. Some will spend one minute, and others will spend two hours, the question is the ratio of those making short calls versus those that spend more time on phone (think house maids and rumormongers). This is all based on the premise that they gather a real number of subscribers. There will always be that average time spent on phone and it can work in their favor if a bigger number of their subscriber base makes more short calls off net, as this will definitely keep the interconnection rates in check.

A PROBABLE NO-HOPER STRATEGY

Smart telecom’s current strategy is like déjà vu all over again, we saw the ‘price war’ card at play when Warid came into the market and it proved that it’s never about low prices for a telecom company to survive in Uganda. There is no doubt, Warid built it’s self a big brand as that network that gave free calls, but this strategy wouldn’t sustain business at least from the investor’s point of view. Which ever perspective you look at it, Smart Telecom has a lot cut out for it to make sure that their strategy is sustainable in the long run and the ‘Smartness’ of the strategy all lies in the numbers. [badge variation=”badge-success”]All gifs courtesy of reactiongifs[/badge]

The love for gadgets and technology is deeply rooted in his DNA, he is a blogger and really obsessed with cool devices.
Roger is the EIC at Techjaja and also he loves creepy movies, and takes you very, very seriously. May be!!